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Rating Action:

MOODY'S LOWERS DEBT RATINGS OF UNITED AIR LINES (SENIOR IMPLIED TO B3 FROM B1)

21 Dec 2001

Approximately $13.8 Billion of Debt Securities Affected.

New York, December 21, 2001 -- Moody's Investors Service downgraded the debt ratings of United Air Lines, Inc. ("United"), senior implied to B3 from B1. The ratings outlook is negative. This rating action reflects Moody's view that the outlook for United's cash flow has deteriorated and that large cash losses from operations of the last several months have sharply eroded United's financial profile. Recovery of adequate levels of cash flow will be constrained by the company's high cost base, in Moody's opinion. United has adequate liquidity at this time, but also has one of the highest levels of "cash burn" in the industry leaving it more vulnerable to a prolonged period of business weakness. These concerns are balanced against the company's business franchise, and the potential benefits of restructuring and cash conservation initiatives including deferral of capital expenditures. The current ratings anticipate a measurable recovery in operating cash flow over the next year or the ratings could be further pressured. The rating action completes the review of United's ratings that began after the terrorist attacks of September 11th.

Ratings affected are:

United Air Lines, Inc

Senior Implied Rating to B3 from B1

Issuer Rating to Caa1 from B2

Senior unsecured debt to Caa1 from B2

Industrial Revenue Bonds to Caa1 from B2

Equipment Trust Certificates to B1 from Ba2

Enhanced Equipment Trust Certificates, Series 1997-1, Class A to Baa3 from Baa1

Enhanced Equipment Trust Certificates, Series 1997-1, Class B to Ba2 from Baa3

Enhanced Equipment Trust Certificates, Series 2000-1, Class A to Baa3 from Baa1

Enhanced Equipment Trust Certificates, Series 2000-1, Class B to Ba2 from Baa3

Enhanced Equipment Trust Certificates, Series 2000-2, Class A to Baa3 from Baa1

Enhanced Equipment Trust Certificates, Series 2000-2, Class B to Ba2 from Baa3

Enhanced Equipment Trust Certificates, Series 2000-2, Class C to Ba3 from Ba1

Enhanced Equipment Trust Certificates, Series 2001-1, Class A to Baa3 from Baa1

Enhanced Equipment Trust Certificates, Series 2001-1, Class B to Ba1 from Baa2

Enhanced Equipment Trust Certificates, Series 2001-1, Class C to Ba3 from Ba1

Enhanced Equipment Trust Certificates, Series 2001-1, Class D to B3 from B1

Shelf registration for senior secured debt to (P)B1 from (P)Ba2, for senior unsecured debt to (P)Caa1 from (P)B2, and for subordinated debt to (P)Caa2 from (P)B3

Jets Equipment Trusts

Series 1994-A, Class A to Ba3 from Ba1, Class B to B2 from Ba3

Series 1995-A, Class A to Ba2 from Baa3, Class B to B1 from Ba2, Class C to B2 from Ba3

Series 1995-B, Class A to Ba2 from Baa3, Class B to B1 from Ba2, Class C to B2 from Ba3.

UAL Corporation

Preferred stock to Caa3 from Caa1

Conv. Preferred stock Ser. A to Ca from Caa2

Cum. Preferred stock Ser. B to Ca from Caa2

Issuer rating, to Caa1 from B2

Shelf registration for senior unsecured to (P)Caa2 from (P)B3, for subordinated debt to (P)Caa3 to (P)Caa1, and for preferred stock (P)Ca from (P)Caa2.

UAL Corporation Capital Trust I: preferred stock, to Caa3 from Caa1

United's 3Q 2001 operating loss was among the highest in the industry. The company's costs are higher than other major competitors, and of particular concern is that the future labor costs for United and the rest of the industry remains uncertain. The substantial wage increases negotiated by several unions in 2000 have proven to be unsustainable at current revenue and productivity levels. Management has begun discussions with all labor groups to identify mechanisms to deal with the company's current financial circumstances. UAL's machinists have threatened to strike, but a presidential review board has been appointed to mediate the dispute which should defer near term strike risk. Meaningful cost cutting has already been accomplished and benefits from the programs are expected to be realized in 2002. A significant reduction in unit costs is a critical component of United's ability to return to positive cash flow and profitability, but a resolution of labor issues and the fragile nature of the airline industry will be significant challenges in achieving this goal. Moody's believes that losses for United will continue into 2002, and that it may well be several years before the company returns to prior levels of financial performance

One partial offset to the higher labor costs is that United was able to negotiate an easing of restrictions on its use of regional jets in its current agreement with its pilots. These aircraft allow the company to continue to operate on lower demand routes than would be economic with larger gauge aircraft. In this context, United has cut absolute capacity more than any other domestic airline as measured by available seat miles. The ability to use lower cost RJ's has enabled United to maintain a robust route network despite the broader reduction of capacity. Moody's also noted that United has benefited from relatively low fuel costs, but may be exposed to future fuel price increases if hedging alternatives for the industry become more narrow in the current difficult environment.

United cash level is high by both its own historical levels and in relation to the industry, and the company has added to the cash position since September with additional financings. Further, the company reduced or deferred the largest near term cash requirements, especially for equipment purchases. Capital expenditures for FY 2002 have been reduced by several billion dollars from budget, and committed financing has been arranged for all future aircraft purchase commitments. The primary near term demand for cash is excise tax payments, due in January 2002. The company also reports approximately $4 billion in unencumbered assets, which could be pledged to secure additional financing if needed. While a helpful cushion, this availability could be quickly absorbed if the company does not reverse its current cash burn. Moreover, the company has the potential to seek further assistance in the form of government guaranteed loans under the airline stabilization program.

Airline Industry Framework and Ratings Outlook:

The ratings reflect the more difficult business environment facing United and all airlines due to the weak economy and the specific effects on the airline industry following the September 11 terrorist attacks.

The rating agency noted that the airline industry is fragile and now especially vulnerable to shock risk. The negative rating outlook considers the risk that any adverse development that might otherwise have been easily tolerated, could have more devastating implications for a carrier in the current environment. Weakness in industry's earnings was evident before September 11th, but was significantly exacerbated by the specific implications of the terrorist attacks. Most industry participants anticipate losses and significant cash flow deficits for the fourth quarter of 2001. The industry has taken specific actions to cut capacity, reduce costs, and conserve cash, but Moody's believes that losses are likely to continue well into 2002 for most carriers, and that it could be some time before the airlines return to historic levels of financial performance.

Industry operating capacity is down about 20%. While the load factor is increasing and approaching the levels of late 2000, a portion of the increase has been achieved partly through these capacity reductions. The absolute number of passengers carried is lower. Moreover, much of even this traffic has been stimulated with fare sales and yields (revenue per passenger seat mile) remain depressed on a year over year basis. Business traffic, which provides higher yields, remains at levels well below those seen a year ago.

Looking forward, Moody's believes that there are three principal risks which will affect the industry's ability to rebuild its revenue base: 1) recovery of the US economy from current depressed levels, specifically improved employment levels which will stimulate higher yielding business travel, 2) rebuilding passenger confidence in the safety and efficiency of the domestic airline system, and 3) constraint on the part of all airlines in adding capacity back into the system. The US economy remains in recession and an upturn may not materialize until well into 2002. The airline industry traditionally lags developments in the broader economy, suggesting a more protracted period of weakness for airlines. Because approximately half of the reduction in airline capacity in the United States is as a result of lower utilization than permanent grounding of aircraft, Moody's is concerned that underutilized capacity can be easily and quickly reintroduced into the system at the first sign of strengthening demand. This could temper the financial benefit of any recovery in industry fundamentals. Finally, passenger sentiment remains highly sensitive to safe and efficient functioning of the airline system, and any adverse events could prompt a further reduction in load factors. Consequently, Moody's anticipates that United's revenue, and the revenue of most major carriers, will be lower in 2002, and only begin to recover to pre 9/11 levels during 2003.

Although an airline industry is a critical factor in a modern economy, the current financial profile of United is subject to further deterioration if the company is unable to address its cost structure, if market conditions do not recover in 2002 and if, for whatever reason, capacity remains at levels that continue to constrain increases in yields.

UAL Corp., headquartered in Elk Grove Village, Illinois is the parent of United Air Lines, Inc., the second largest air carrier in the world.

New York
Michael J. Mulvaney
Managing Director
Corporate Finance
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

New York
Richard Bittenbender
VP - Senior Credit Officer
Corporate Finance
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

MOODY'S LOWERS DEBT RATINGS OF UNITED AIR LINES (SENIOR IMPLIED TO B3 FROM B1)
No Related Data.
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